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GUEST ARTICLE US-Mexico Trade Relations Not as Sweet Due To Potential Trade War on Sugar and High Fructose Corn Syrup, by Les Glick

June 10, 2014
GUEST ARTICLE US-Mexico Trade Relations Not as Sweet Due To Potential Trade War on Sugar and High Fructose Corn Syrup, by Les Glick

A recent case under the antidumping and countervailing duty law against imported Mexican sugar is only the latest chapter in the complicated saga of the relationship between the United States and Mexico when it comes to sugar. Sugar has been an impediment to the economic integration of the two countries that was originally foreseen at the signing of the North American Free Trade Agreement (NAFTA). Indeed, due to a dispute between the countries involving the importation of U.S. high fructose corn syrup (HFCS) into Mexico, Mexico did not gain full access to the U.S. market for sugar exports through NAFTA until 2008.In their petition for the imposition of antidumping and countervailing duties on imports of sugar from Mexico, the complainants, the American Sugar Coalition and its members (domestic processors, millers, and refiners of sugar and growers of sugar cane and sugar beets) argue that Mexico’s unfair trade practices—subsidizing the sugar production and exports (in violation of the countervailing duty law and also importing sugar in the United States at less than fair market value in violation of the antidumping law)—cost the American sugar industry $1 billion this past year. The petition was submitted in late March, and in early May the U.S. International Trade Commission (USITC) voted to continue the investigation into raw and refined cane and beet sugar, in dry and liquid forms, including colored sugar, flavored sugar, and blends with other sweeteners, due to a "reasonable indication that a U.S. industry is materially injured or threatened with material injury by these importations." This affirmative USITC preliminary finding meant that the U.S. Department of Commerce would continue its part of the investigation into imported Mexican sugar, looking at potential less than fair value sales and potential use of illegal subsidies that would violate the U.S. countervailing duty statute. The Mexican government has denied allegations that it subsidizes its sugar industry or dumps sugar in U.S. markets. While the industry awaits further determinations regarding the antidumping and countervailing duty investigations into imported Mexican sugar, the importers and consumers of Mexican sugar are facing uncertainty and in many case seeking alternative sources. Since most sugar exporting countries have quotas on their U.S. imports, shortages and higher prices are likely due to NAFTA. Mexico was exempted from quotas.The Commerce Department’s preliminary determination for the antidumping investigation was due September 4 but was extended until October 24, 2014. The countervailing duty investigation is due August 25 (which is the new extended deadline). After these dates, importers will have to pay provisional duties. The petition seeks duties of 62.44 percent for raw sugar and 44.88 percent for refined sugar.The highly protected U.S. sugar industry in the U.S. revolves around a sugar price-support program administered through the U.S. Department of Agriculture (USDA). The program, designed to support sugar prices, provides loans to U.S. sugar processors with very few restrictions and even the ability to borrow again after defaulting, without any consequence. The USDA has an interest in keeping sugar prices high, as the risk of sugar processors’ defaulting is lower when sugar prices stay above certain levels.U.S. sugar processors can take unlimited loans from the USDA, as long as they are secured with sugar as collateral. The sugar posted as collateral typically is worth less than the processor’s unpaid loan. The USDA tries to sell excess sugar to ethanol producers. By the end of 2013, the sugar industry was looking at $280 million owed to the USDA that it could not repay. In 2013, processors defaulted on $171.5 million after the USDA spent $106.7 million to buy sugar in an effort to boost prices.The U.S. sugar industry does, however, account for 142,000 American jobs. This gives the U.S. sugar industry a great deal of political power. While sugar production only makes up 4 percent of U.S. agriculture, the sugar industry reportedly accounts for one-third of political contributions.The Mexican sugar industry provides 500,000 Mexican jobs among the 54 sugar mills in the country. While the American Sugar Coalition argues that nine of these mills are government-owned in their petition, Mexico has been seeking ways to privatize these companies. In 2001, the Mexican government took over 27 sugar mills to save the national sugar supply and thousands of jobs. Since 2006, Mexico has been re-privatizing the mills. The nine remaining mills currently owned by the government belonged to one sugar industry group, Grupo CAZE.Mexico denies that it subsidizes its sugar industry. Rather, the Mexican government has argued that it deliberately diverts sugar exports away from the U.S. in an attempt to relieve over-supply, and the Mexican government states that it has been doing so in cooperation with U.S. authorities—leaving the Mexican government feeling confused by the Commerce Department's institution of these investigations. Imports of sugar into the U.S. fell in 2012-2013 due to a large U.S. domestic crop.While exporting sugar to the U.S., there has been a historical hesitance to integrate high fructose corn syrup (HFCS) into food and beverage products made in Mexico, and reluctance to import U.S. HFCS products into Mexico. It is important to note that beverages containing HFCS were taxed at 20 percent by the Mexican government in 2002 as part of a disagreement over the U.S.’s NAFTA commitments. Mexico argued that NAFTA allowed them to sell surplus sugar duty-free in the U.S., but that the U.S. had not respected this agreement. Ultimately, the Mexican government paid $58.4 million to the U.S. in restitution for the HFCS tax, an amount decided by a NAFTA Chapter 11 tribunal in 2008.The U.S. Agriculture department has called the filing of the sugar case “ill-timed” due to ongoing sensitive negotiations regarding access to Mexican markets for U.S. potatoes and discussions of country-of-origin labeling requirements for meat contained in the farm bill. U.S. government officials are worrying about how Mexico perceives the current investigation into imported sugar, and what repercussions it could have in the futureMexico may have the ability to bring the U.S.’s sugar price-support program before the World Trade Organization (WTO) with the argument that it doesn't comply with specific WTO standards.Another cost that comes as a result of the current investigation is the potential for retaliation from Mexico in the form of the imposition of renewed duties on U.S. exports of HFCS to Mexico. Concerns such as this have caused the U.S. corn and HFCS industry to become involved in the case on the side of the Mexican sugar producers in arguing that the imposition of antidumping and countervailing duties would be unfair, if only to save its own stake in the Mexican market.There are rumors that Mexico might also delay the finalization of the Trans-Pacific Partnership (TPP), which includes the three NAFTA countries and a number of Asian countries, which the U.S. hoped to conclude by the end of 2014.Author’s Note: "On August 25, 2014, the U.S. Commerce Department announced a preliminary countervailing duty average rate of 14.87%. For more information contact lglick@porterwright.com.

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